By Nouriel Roubini*
Inflation rose sharply throughout 2022 across both advanced economies and emerging markets. Structural trends suggest that the problem will be secular, rather than transitory. Specifically, many countries are now engaged in various “wars” – some real, some metaphorical – that will lead to even larger fiscal deficits, more debt monetisation, and higher inflation in the future.
The world is going through a form of “geopolitical depression” topped by the escalating rivalry between the West and aligned (if not allied) revisionist powers such as China, Russia, Iran, North Korea, and Pakistan. Cold and hot wars are on the rise. Russia’s brutal invasion of Ukraine could still expand and involve NATO. Israel – and thus the United States – is on a collision course with Iran, which is on the threshold of becoming a nuclear-armed state. The broader Middle East is a powder keg. And the US and China are facing off over the questions of who will dominate Asia and whether Taiwan will be forcibly reunited with the mainland.
Accordingly, the US, Europe, and NATO are re-arming, as is pretty much everyone in the Middle East and Asia, including Japan, which has embarked on its biggest military build-up in many decades. Higher levels of spending on conventional and unconventional weapons (including nuclear, cyber, bio, and chemical) are all but assured, and these expenditures will weigh on the public purse.
The global war against climate change will also be expensive – for both the public and private sectors. Climate-change mitigation and adaptation could cost trillions of dollars per year for decades to come, and it is silly to think that all these investments will boost growth. After a real war that destroys much of a country’s physical capital, a surge of investment can of course produce an economic expansion; nonetheless, the country is poorer for having lost a large share of its wealth. The same is true of climate investments. A significant share of the existing capital stock will have to be replaced, either because it has become obsolete or because it has been destroyed by climate-driven events.
We are also now waging a costly war against future pandemics. For a variety of reasons – some of them related to climate change – disease outbreaks with the potential to become pandemics will become more frequent. Whether countries invest in prevention or deal with future health crises after the fact, they will be incurring higher costs on a perpetual basis, and these will add to the growing burden associated with societal aging and pay-as-you-go health-care systems and pension plans. Already, this implicit unfunded debt load is estimated to be close to the level of explicit public debt for most advanced economies.
Moreover, we will increasingly find ourselves fighting a war against the disruptive effects of “globotics”: the combination of globalisation and automation (including artificial intelligence and robotics) that is threatening a growing number of blue- and white-collar occupations. Governments will be under pressure to help those left behind, whether through basic-income schemes, massive fiscal transfers, or vastly expanded public services.
These costs will remain large even if automation leads to a surge in economic growth. For example, supporting a meager universal basic income of $1,000 per month would cost the US about 20% of its GDP.
Finally, we also must fight an urgent (and related) war against rising income and wealth inequality. Otherwise, the malaise afflicting young people and many middle- and working-class households will continue to drive a backlash against liberal democracy and free-market capitalism. To prevent populist regimes from coming to power and pursuing reckless, unsustainable economic policies, liberal democracies will need to spend a fortune to reinforce their social safety nets – as many are already doing.
Fighting these five “wars” will be expensive, and economic and political factors will constrain governments’ ability to finance them with higher taxes. Tax-to-GDP ratios are already high in most advanced economies – especially Europe – and tax evasion, avoidance, and arbitrage will further complicate efforts to increase taxes on high incomes and capital (assuming such measures could even get past the lobbyists or secure buy-in from center-right parties).
Thus, waging these necessary wars will increase government spending and transfers as a share of GDP, and without a commensurate increase in tax revenues. Structural budget deficits will grow even larger than they already are, potentially leading to unsustainable debt ratios that will increase borrowing costs and culminate in debt crises, with obvious adverse effects on economic growth.
For countries that borrow in their own currencies, the expedient option will be to allow higher inflation to reduce the real value of long-term fixed-rate nominal debt. This approach functions as a capital levy against savers and creditors in favour of borrowers and debtors, and it can be combined with complementary, draconian measures such as financial repression, taxes on capital, and outright default (for countries that borrow in foreign currencies or whose debt is largely short-term or indexed to inflation). Because the “inflation tax” is a subtle and sneaky form of taxation that doesn’t require legislative or executive approval, it is the default path of least resistance when deficits and debts are increasingly unsustainable.
I have focused primarily on demand-side factors that will lead to higher spending, deficits, debt monetisation, and inflation. But there are also many medium-term negative aggregate supply shocks that could add to today’s stagflationary pressures, increasing the risk of recession and cascading debt crises. The Great Moderation is dead and buried; the Great Stagflationary Debt Crisis is upon us.
Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Chief Economist at Atlas Capital Team and the author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022). Copyright: Project Syndicate, 2022, published here with permission.
86 Comments
With Russia distracted (and weakened) by its campaign in Ukraine, many countries could get fidgety with this change in world order, particularly on the Eurasian front, and reopen dormant skirmishes.
US-Taiwan building up against China, India stepping up the ante against Pakistan-occupied territories in its north, Turkey's planned invasion of Syria, the ongoing Libyan Civil War, Azerbaijan's ambitions to reclaim lost territory - just to name a few.
2023 could become the year of conflict.
Almost everything you can do now, particularly for profit, starts with the assumption whatever you're doing has negative consequences that you either need to pay compensation for, or ensure you've got adequate safeguards in places to mitigate them. Environment, health and safety, people's feelings, whatever.
Used to be you'd work out if what you were doing made money and you'd just go do it.
"It is my view that the economic path we have been following since the GFC has been setting us up for a massive economic correction on a scale similar to 1929." (from that article)
1929 might look tame to what's heading down the track towards us, for one salient reason - there were 2 billion of us, relatively young, back then. Today there are 8 billion, with a median age over 30 (Japan is nearly 50!). So rude maths might tell us how much worse 'things' can get.
"The era of financialization, globalization and low-cost, abundant oil/natural gas began over 40 years ago in 1981. The era of digital / Internet technologies took off about 30 years ago. All of these dynamics accelerated in the early 2000s, roughly 20 years ago. Only those 60 and older experienced working in a previous era (pre-1981). Eras may last decades, and only those who've lived long enough to recall previous eras have experienced the transition from one era to the next. All of these dynamics are entering a phase of nonlinear turbulence as the changes are outpacing these highly streamlined / optimized systems' ability to self-correct. This nonlinear instability is being accelerated by doing more of what worked in the previous era, in the mistaken belief that the 2020s are simply an extension of the eras that began 40 and 30 years ago.
The fixes that worked in the past won't resolve the nonlinear instability because all these dynamics have reached saturation: adding more debt no longer generates organic expansion of productivity, all it does is inflate an even larger and more unstable credit-asset bubble. All the lessons we learned in the past 40 years will not only be useless in this new era, they will be disastrously counter-productive. "
(CH Smith)
It's hard because none of these gurus trying to interpret charts or make historic parables have much better predicting abilities than a spinning wheel.
If as a for instance we look at all the wars America fought in the 20th century, each one conducted itself quite differently. If you strategized based on the previous conflict determining the next, you were in for a nasty surprise.
I think all the noise is detracting from covering off the basics first. I'd like to think that the economy in general will gravitate back towards fundamentals after this cycle, but my gut says the central authorities will continue to allow for distortions.
I think all the noise is detracting from covering off the basics first. I'd like to think that the economy in general will gravitate back towards fundamentals after this cycle, but my gut says the central authorities will continue to allow for distortions.
Huh? I thought you were a cheerleader for the never-ending credit creation bubble. Or perhaps you're talking about 'after this cycle'. Does that mean the bubble is still in play?
I'm not a cheerleader for much, but I do think it's important to determine what you're living in, and what's likely to change or remain, irrespective of how you would or wouldn't like things to be.
I dont see much in the chicken bones to suggest that long term, central banks and governments will reverse course on money printing and fiscal stimulus.
I tend to agree. I don’t think the powers that be can contemplate anything else.
Having said that, I am not so sure that ‘the same old tricks’ have much if any gas left in them. And I certainly struggle to see where another asset price boom could possibly come from….
So maybe, just maybe, their hands will be forced to look at some new ways of approaching things…
https://www.oftwominds.com/blog.html#jump
Charles has been in that space for a while now so us interest.co old timers are very familiar with him. There is a consistent theme in his last 5 articles, they are well worth reading.
He is a good analyst and knows his turf well. He draws upon well known principles such as the Seneca Effect, or known in business as the Sigmoid Curve.
Time is the issue with guys like this trying to predict the future. But apart from timing, I think he makes a pretty good go of it.
Those post 1929 coming off the soup kitchens & hard labour of public works etc were not though saddled with a maxed out credit card nor likely a mortgage that exceeded the value of their home plus finance on such as vehicles. Thus there will be quite a lot more to reckon with other than a priority of putting food on the table so to speak.
Thus, waging these necessary wars will increase government spending and transfers as a share of GDP, and without a commensurate increase in tax revenues. Structural budget deficits will grow even larger than they already are, potentially leading to unsustainable debt ratios that will increase borrowing costs and culminate in debt crises, with obvious adverse effects on economic growth.
Past time to eliminate overhead costs of rent extraction from national GDP accounting.
Whereas formal economic models explicitly state their assumptions (whether realistic or not), national accounting frameworks feature various implicit boundaries, which are not shown along with the data but are rather buried in technical notes on ‘methodology’. For example, the interest- based financial services mentioned above were originally considered mere transfers and thus outside the production boundary before 1968 (Christophers 2011). The 1968 System of National Accounts (1968 SNA) moved the production boundary by representing these services as inputs to an imaginary sector (thus making the assumption that they were ‘implicitly’ productive), whereas the 1993 SNA moved it further by considering such services to be the final consumption of households (and thus explicitly productive). The 2008 SNA went even further by stipulating that even the lending of banks’ own funds was a productive activity (dropping the pretense of ‘intermediation’ between savers and borrowers originally used to portray banking as a productive activity). In each of these cases the assumption of the level of productiveness of interest-based financial services was not explicit in the data, but rather implicit in the location of the boundary. Similarly, R&D expenditures by firms, governments and non-profit organizations were previously assumed to be intermediate inputs (or costs) of these entities, and thus deducted from GDP, but have been reclassified by SNA 2008 as investments in fixed assets, and are thus now counted in GDP. This adjustment added around $560 billion to US GDP in 2013 (when the country adopted SNA 2008) - more than Sweden’s entire output that year - and conveniently reinforced “America’s status as the world’s largest economy and [opened] up a bit more breathing space over fast-closing China” (EIU 2013). Different boundaries in the national accounts are thus based on different assumptions and lead to different results, but less explicitly than formal economic models. This contrast with explicit models is thus the second reason why MMT had not yet affected national accounting. Most economists do not even learn the details of national accounting in their professional training, and the measurement (or rather construction) of macroeconomic aggregates such as GDP is outsourced to official statisticians. It is simply not considered part of the conversation, neither in mainstream nor in heterodox circles. Link
An important piece in terms of understanding where we are. Really a process of smoke and mirrors has occurred that has obscured it.
The offhand comment I read that GDP is the right side of the quantity theory of money over ten years ago is what lead me to rework it. I realised it didn't account for interest. I still think my rework does a good job of accounting for the interest. The means of money creation not so important, you just know it is there from the various parts of the equation. I kept the interest on the left side, but it has a bearing on the right side. Prices can go up with no increase in production simply because of the monetary effect.
M.V=P.Q becomes (M.V)+i=P.Q
I've seen it attempted in a much more complex way by a friend of that Raf Manji that hung about here for a little bit.
I guess the principle here is that a liability has been transferred to the asset side. Isn't this a smoke and mirror trick that every council in the country has done? Putting bridges, roads, swimming pools etc on to the asset side so they can borrow money against them?
Holy crap it is going to be one hell of a shit storm when it all unravels, which it must.
Interesting. I remember working on system modifications to support sna when I was in NZ treasury in the 90s. This involved a magician who understood it being wheeled out, making an arcane proclamation and then being wheeled away. The nerds and I would then do what he said.
Anyone who describes the challenges we face in financial (capital) terms is spectacularly missing the point. Climate change, conflict over resources, mass migrations, superpower cold wars, ageing populations, natural disasters etc require countries to plan and prepare for the future. For NZ, that means working out what materials, energy sources, infrastructure, technology, people, and deals / relationships we need to support a thriving population - and how we avoid imbalances in our trade and relationships that could leave us exposed to risk.
What do you want thriving to mean? For me, it would be a country where:
- someone working fulltime can afford to live well and support a family with a couple of kids
- people enjoy their leisure time - and there is loads of fun stuff to do
- inequalities are much reduced - such that crime is a rarity
- we can swim in the rivers again, and breath clean air
- the economy is in 'steady state' - using natural resources at a sustainable rate (replenishable)
- we reduce our vulnerability to global shocks
- you get the gist!
In terms of population size - I am ambivalent, what matters is the above.
We have not always run a trade deficit - and we could lower it substantially or eradicate it if we reduced our reliance on imported oil and food, and increased our resource efficiency. For example, we use ridiculous amount of land to produce proteins, we drive 3 tonne V8s around a 100kmh road network, we let vast quantities of heated air disappear through leaky house walls into the atmosphere etc.
I think back to my childhood in late 80's - 90's. My father worked in a factory and my mother P/T at Deka. They bought a 3 bed home in Spreydon, CHCH on 1/5 acre only 600m walk from primary school.
Financially it wasn't easy, but today that house is worth $600k which would be financially crippling for 1.5x min wages, the mortgage payments alone would take up the full time wage. We still managed to swim in the rivers, once a year to Orana Park etc.
""Climate change, conflict over resources, mass migrations, superpower cold wars, ageing populations, natural disasters "" Six issues with five being problems but the ageing population is a cause for celebration. Humans evolved to have grandparents - people to provide help with child rearing and to carry cultural wisdom. It was civilisation: living in towns and cities that caused adults to die young. Now we have returned to what evolution intended: a society with a substantial number of elderly people. Lets rejoice that most Kiwis will not be dying of disease or warfare before they reach the prime of their life. Yes the govt does need to plan but they can consult the accumulated wisdom of our ageing population.
Great challenge, thank you. We should absolutely not problematise having more older people around to share wisdom and play an active part in community and family life. What we do need to watch is that the needs of older people are met by their communities - not everyone who needs support will have a family network that can lean in and provide it. Imagine a society where we have personal shoppers to help rich people choose clothes, but a shortage of care workers to help older people live well? Oh, wait, we're there.
Our tax and benefit systems punish families - I'm retired with my only income being pension and a generous working wife. If we separated my Super would increase and I'd qualify for accommodation benefit. The govt should encourage marriage both out of kindness and well-being (their principle) and the savings on care of the elderly - if either I or my wife need care in our extreme old age then we are likely to do it to one another a lot better and cheaper than the state will ever manage.
For example if my wife could transfer some of her PAYE income to me we would get a modest reduction in taxation. That nudges couples to stay together.
Cancer, diabetes, obesity, on the rise. All cause deaths on the rise. Civilization has evolved a long way from what was intended. Now we have toxic crowded cities, eating chemically produced fake food, devoid of nutrition, addicted to Big Pharma drugs and people are living a deluded quality of life. Most of your aging population (boomers), are really sick, even a mild cold knock them around.
The current aging population pre-date most of those toxic lifestyles. It is the next generation that will be sick. Trail walking, ocean swimming, cycling - full of over seventies. It is teenagers who are missing the active life - I've swum at the same spot for 15 years and the wharf that was crowded with teenagers jumping into the sea is now almost empty. Same wharf, same sea (slightly warmer), new generation of coach potatoes.
I could almost give you a thumbs up for that comment fossil, but then I remember your inability to connect the dots between our fossilised hydrocarbon burning binge (+ all the chemical feedstocks they are used for), and the current predicament we find ourselves in. "we have toxic crowded cities, eating chemically produced fake food, devoid of nutrition, addicted to Big Pharma drugs and people are living a deluded quality of life" (sic).
"War on climate change" expensive? I'm sure industrialists hope so. A massive re industrialisation is the plan to fix a problem caused by industrialisation? The depth of stupidity displayed is assounding! A climate fix is actually really cheap in reality. Just do much less. Of everything. Problem solved.
Actually the pre war level of population/consumption, was probably at a level that could be comfortably maintained for a substantial period of time. Industrial ag hadn't been invented, massive movements of "tourists" science fiction. No nuclear waste repositories, two thirds of the planets landmass considered wilderness and a climate still within the range of short term natural variability. People lived, loved and had satisfying lives. Unlike today, where our over consumptive lifestyles will be severely curtailed sometime in the next decade, or two, for the vast majority.
Just do much less. Of everything. Problem solved.
And dozens more problems created.
Not least of which is that Turkeys don't vote for Christmas.
Just to make it very clear what I mean - if any political party suggested what you said to do, the opposition would be agin it and would win the subsequent election.
We already see Labour backed down on making farmers pay for *some* of their climate pollution.
Technically, it will be relatively much easier, the path has been discovered, the research done, it’s no longer virgin territory, and the technology base is so much further advanced; comms, navigation and even life support systems will be so much more advanced.
But the 1960s America had a relatively cohesive society and government, and a government willing to spend to ‘beat’ the Russians. That no longer is the case, the American public is massively divided, the govt a lumbering mess with no clear competent direction. Now it’s much more likely that private enterprise will have to do the heavy lifting, rather than government. And is there really much of a profit motive for private industry to go to the moon? Plenty of commercial motivation for throwing things (but not people) into geosynchronous and other earth centric orbits, but I don’t see much motivation for businesses to send people or even machinery to the big lump of rock that is the moon, or beyond.
We are stuck with the Elon Musks of the world driving it for now.
“Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. ... In the U.S., it is 420%, which is higher than during the Great Depression and after World War II.”
- Nouriel Roubini
NZ total housing stock value to GDP is approx 400%. Since the early 90s, NZ household debt to GDP has risen approx 4x.
https://www.project-syndicate.org/commentary/stagflationary-economic-fi…
I disagree. I understand why the MMT camp explains how everything is hunky dory because the distributed ledger demonstrates that all debt is effectively an asset. But that's not Roubini's point. It's the debt load relative to a measure of what economies produce (GDP). Arguing that total debt relative to GDP is all the same regardless if it is 1x, 4x, 10x is a cop out in my opinion.
So is viewing all debt to GDP the same.
When you're 20, your debt to GDP should likely be below 1:1, or a fraction thereof. If it's 7:1 at age 35 you can't view the two scenarios as analogous.
One issue is working out what stage of its life cycle an economy is at (i.e it's potential to service debt), and not necessarily it's debt load.
I suggest you actually read what Roubini says. Your analogy of a household doesn't make much sense. Roubini is talking about aggregate debt to GDP. And it's quite simple. The ability to service debt is actually reliant on economic product.
If debt to GDP is say 4x and and assuming a rate of debt servicing at 3%, how much should your economy grow pa to keep an even keel?
I used an analogy of a human on the basis it should be easier to understand the problems in viewing all debt the same.
It's why making comparisons between economies is problematic. A society reaching maturation like say Germany or Japan has some fundamentals that differ greatly from a new world Economy like the United States. We can see this play out by how these economies respond differently to low interest rate environments.
Even though you mentioned this being simple, I dont think your economy needs to grow at 12% p.a. to service that debt, unless you continue to take on future additional debt while servicing the existing debt at the same time.
Depending on the duration of the debt (which is hard in this example as it's a combined debt), in order for the 'even keel' Goldilocks zone of taking on debt and not feeling it, you would need to increase your GDP by 12% over the duration of the loan, and not every year. You seem to think that has to occur in Y1 of the debt (and every year there after?).
I already answered your part two in a post above, if your income doesn't rise inline with your debt servicing obligations you either have to find the money elsewhere, restructure your debt, or default.
Even though you mentioned this being simple, I dont think your economy needs to grow at 12% p.a. to service that debt, unless you continue to take on future additional debt while servicing the existing debt at the same time.
It is simple. Unless you want to conjure up 'debt servicing' by some other means outside productive activity. This is essentially waht Roubini is talking about. Now that might not fit with your neverending asset price growth paradigm, but that's just a denial mechanism.
In terms of GDP , debt contributes to demand.
If debt no longer grows and income is used to pay down debt, (in an aggregate level ) ,the impact on demand is quite profound.
End result would be an economic contraction ,with levels of debt default, as some people's incomes decline and may no longer be sufficient to meet debt servicing needs.
Good paragraph:
For countries that borrow in their own currencies, the expedient option will be to allow higher inflation to reduce the real value of long-term fixed-rate nominal debt.
Maybe that's the reset - several decades of inflation to make the debts small again.
For countries that borrow in their own currencies, the expedient option will be to allow higher inflation to reduce the real value of long-term fixed-rate nominal debt.
Maybe that's the reset - several decades of inflation to make the debts small again.
Not sure I follow. You mean countries that do not fund their debt externally? Like Japan?
Yes... I agree. ... great paragraph
The arm wrestle will be between fighting inflation without imploding the debt burden. ( A form of debt monetization )
(The Global debt Burden is probably a bigger problem than inflation.)
Thou... the only way to reduce the real value of debt is for incomes to rise ( thru monetary inflation) .... so maybe wage rate inflation is not such a bad thing..
In that world asset prices will likely go, down and up, sideways, in nominal terms .. while incomes may rise to bring price/income ratios , more into line.
This was how it was in the 1970s'... thou the debt levels were nowhere near what they are now.
Question is... Will people and Govts use that extra income to pay down debt. Maybe. but ... maybe not.
Well he was right the last time he forecast what was about to happen years before the GFC happened.
With his latest series of insights that all make coherent sense within the context he provides to explain it all in detail. I haven't heard anything better than that.
I guess the next thing is, will the dying US empire go out with a bang or a whimper?
Surprised no one has ventured a guess at what the ‘new paradigm’ might look like….
Clearly it’s crystal ball gazing but it would be interesting to speculate - given the most recent paradigm has leaned heavily on a never before seen scale of consumption- tech only being the latest means of delivering ever more things to consume (NFT anyone??), certainly in western economies the idea that we can sustain this definition of success (economic growth based on consumption) indefinitely has been taken as a given - and it may be pretty hard (but necessary) to convince people to define it some other way.
Would the ‘great moderation’ really be so bad? Would having less - but better access to the important stuff (food, healthcare, housing, education) really be bad for us? How much happier is our wealthy society for all our overseas travel, big expensive toys, endless plastic junk and food devoid of nutrition?
The concept of a ‘Well-being Budget’ was supposed to address all that but has managed to fail fairly spectacularly (the PM hasn’t uttered the word in a suspiciously long time..)likely due to being mostly just nice words, but when fundamental need begins to rationalise scarce resources the concept of well-being may still have value. The obvious problem being that rich counties can continue to procure poor country resources and ‘stave off’ this paradigm shift for as long as poor countries tolerate this exchange (which they will for as long as their autocratic leaders profit from it). So while moderation might be badly needed - the path to achieving it may be a long way off - there might be other paradigms in between - but that’s my crack at it.
Happy new year.
I think there’s every chance that people will have no choice but to enter the Great Moderation, and yes in many respects it will be a good thing.
Housing could be a case in point - I have long thought that there’s much more opportunity for multigenerational housing models, or multi-household. So rather than developers building townhouses, multi generations of a family or multiple groups of friends doing so.
It would potentially provide much more affordable housing (circa 30% less than current market prices), not to mention greater social connection.
I wonder why it isn’t done more, perhaps development financing by banks is an issue. In which case perhaps the government could step in and help facilitate.
Shared ownership caveats...lol I can see the court cases now...good money for the legal profession...lol ... I have no doubt the RE industry will be looking to entice various individuals into sharehold ownership models as values climb beyond the means of individuals or couples . Inter-generations of folk tied to a curse are my thoughts...lol I see the odd article 'get together with a group of friends and buy a property' however what they dont elaborate on is the legal nightmare it can create for those wanting out . Fools and their money. Fee simple sole proprietor vs making enemies of your former friends...' Morning friends , Id like you to meet my Lawyer '...lol
What's next? Employer based shared home ownership schemes? 4 employees get together and buy a house. That way they can enjoy the T3 Lanes on their 1.5 hour carpool to the work place. Would make "calling in sick" a little less convincing unless you match with some trustworthy work mates.
No I am not talking about shared ownership, other than perhaps for the brief construction period (even that could be worked around). 2-3 townhouses developed together but then on their own freehold titles. Building together gets some efficiency, plus those big savings of no developer margin and no GST.
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